Spatial discrimination, product substitutability and welfare

The paper examines a quantity-location duopoly game in a spatial discrimination model in which the delivered goods are assumed to be imperfect substitutes or complements. By extending the range of the unit transportation cost analysed in the existing literature, it is shown that a dispersed equilibrium arises in which the choice of the optimal locations is affected by the degree of product substitutability. The interaction between the latter and the size of the transportation cost is also discussed in order to verify its welfare implications. In particular, it is shown that in this spatial framework imperfect substitutability may increase welfare. © 2010 The Author. Bulletin of Economic Research © 2010 Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research.